Durable Goods Slammed on Defense New Orders for January 2013

The Durable Goods, advance report shows new orders declined by -5.2% for January 2013.  But that's not the real story as Defense new orders plunged the most since January 2009.  Without defense, durable goods new orders the January decline would have been just -0.4%.  The total durable goods decline was $11.8 billion with transportation dropping by $14.7 billion, a -19.8% plunge from December.  Defense aircraft & parts new orders dropped by $5.1 billion as 43% of this month's decline in durable goods new orders can be attributed to the drop in defense aircraft new orders.


Durable Goods


Below are four graphs of just defense durable goods new orders.   The current new order level of spending is $7.326 billion, a level not seen since January 2009 and a monthly -59.9% decline.    That said, December 2012's increase in defense new orders was a 65.2% gain, so the two together even out defense new orders.  The first graph is by volume of defense new orders.


defense durable 1/13


Here is the monthly percentage change in defense new orders and once can see the December gain against this month's fall below.




The third graph is defense aircraft new orders.  The plunge is dramatic, -63.8%.  That said, December saw a 58.5% increase, so flipping out over aircraft new orders generally is a bad idea. One needs to see a pattern for months, if not years to raise alarm bells.  After some analysis, there isn't anything that unusual here after all.


defense aircraft new orders


The final graph is defense capital goods new orders, which plunged -69.5%.  This is the figure some in the press have been reporting and flipping out on.  It's true this is the largest monthly percentage drop since July 2000.  It's also true that December 2012 showed a 107.3% increase in defense capital goods new orders, a figure not seen since February 2006, as well as right after 9/11, October 2001.  Due to December's dramatic rise, it's no surprise and nothing to get alarmed about for this month's defense capital goods plunge.  The plunge in defense aircraft & parts new orders is clearly the culprit, but generally speaking aircraft and parts is the most volatile new order category for not every day someone orders up a new civilian jet or fighter bomber.


defense capital goods durable new orders January 2013


For all transportation equipment, new orders declined  -19.8%, and this includes volatile aircraft. Motor vehicles alone had no change in new orders, whereas nondefense aircraft & parts also decreased by -34.0%.   Below is a graph of all transportation equipment new orders.


durable goods transportation new orders SA


Core capital goods new orders increased 6.3% for January, which is a much better indicator overall for economic activity.  Machinery soared by 13.5% in new orders while computers plunged -15.5%.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves.



To put the monthly percentage change in perspective, below is the graph of core capital goods new orders, monthly percentage change going back to 2000.  Looks like noise right?  That's why one advance report does not an economy make. 



Shipments overall declined -1.2% from December and bear in mind new orders are not necessarily shipped the next month an order is made. Below is the monthly shipments  percent change for all durable goods shipments.


durable goods shipments


Shipments in core capital goods decreased -1.0% as computers and related products shipments sank by -15.2%.



Inventories, which also contributes to GDP,  increased 0.2% for January after decreasing -0.1% in December.   Probably a bad new indicator, the rise in durable goods inventories was due to transporation equipment accumulating to the tune of a 0.9% monthly increase.  Rising inventories with plunging new orders implies someone, somewhere is going to reduce them to match actual sales demand down the road. 

Core Capital Goods inventories had no change after December's -0.7% drop.     Graphed below are total durable goods inventories. 



Core shipments contributes to the investment component of GDP.   Producer's Durable Equipment (PDE) is part of the GDP investment metric, the I in GDP or nonresidential fixed investment.   It is not all, but part of the total investment categories for GDP, usually contributing about 50% to the total investment metric (except recently where inventories have been the dominant factor).   Producer's Durable Equipment (PDE) is about 75%, or 3/4th of the durable goods core capital goods shipments, in real dollars, used as an approximation.   Below is the national accounts description of PDE:

Nonresidential PDE consists of private business purchases on capital account of new machinery, equipment such as furniture, and vehicles (except for personal-use portions of equipment purchased for both business and personal use, which are included in PCE), dealers' margins on sales of used equipment, and net purchases of used equipment from government agencies, from persons, and from the rest of the world.

The below graph might give a feel for what kind of investment component we might see on PDE for Q1 2013 GDP. This is the monthly percentage change of nominal values, not real, not adjusted for inflation, for core capital goods shipments. We can see Q1 isn't getting off to a great start.



What is a durable good?   It's stuff manufactured that's supposed to last at least 3 years.   Here are our durable goods, related overviews, only some graphs revised.  The durable goods advance report is often revised when the full factory orders statistics are released.

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Q4 GDP revision on Feb. 28th

We will be writing an overview and analysis on tomorrow's Q4 GDP revision. That said, this report doesn't bode well for inventories to be revised upward. We do expect an upward revision due to trade data and for GDP to turn positive. Current guestimate is 0.5% for Q4,

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